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Four types of financial fraud and how to stop them

Tiffany Hutton
29 July 2011 2 minute readShare

Business is tough enough without falling for the many types of fraud that scammers and crooks use to hurt your business. Fight back with our tips on how to spot - and stop - four common frauds.

Do you hear stories about Nigerian email scams and wonder how anyone could possibly be taken in by such obvious fraud? That’s the thing: everyone thinks they’re immune to fraud attempts, but nobody is.

The concept of fraud actually encompasses a lot of different activities. It can range from simple theft to cheque fraud, to much more complicated rackets or identity theft. Because SMEs are often focused on the building and day-to-day running of their business, and may lack the sophisticated processes and structures of bigger enterprises, fraudsters may consider them an easy target.

The forms that fraud may take seem to be limited only by the imagination of the person committing the fraud, but some of the common types of fraud are:

  1. Cheque fraud — Dodgy cheques bounce because there are insufficient funds to honour them, or are simply fakes. In either case, the away to avoid this type of fraud is to insist on bank cheques or avoid cheques altogether. The latter is quite easy in the age of electronic payments. If customers insist on payment by cheque, wait for their cheque to clear before providing goods or services.
  2. Banking/identity fraud — This involves someone acquiring your banking details and then using them to steal from your account(s). Most electronic business banking systems offer multiple security steps for transactions — including security tokens, cross-authorisation etc. — so be sure to take advantage of these security measures.
    You should also be very conscious of keeping your staff details up to date, lest a departing employee access your accounts and steal money.
  3. Direct theft — Employees may ‘lift’ stock or pocket payments by failing to process the sale or deleting invoices. Keeping this type of fraud in check requires vigilance; make sure everyone working in the business knows that stock and payments are checked regularly.

  4. Invoices and payments fraud — These types of fraud rely on your business having less-than-perfect accounting practices that see automatic payments made for incoming invoices for something you haven’t ordered or received. Or payments are made to non-existent employees, or excess amounts paid to actual employees. To avoid this type of fraud, make sure any invoices you receive are checked against the goods or services ordered and that more than one person is involved in the processing of payments.

Simple strategies

Anyone working with your business’s cash needs to have their activities cross-checked by another employee at some stage. If you make this a consistent policy across the business, then it doesn’t imply that you distrust any particular employee.

If you think you have a problem with fraud that you can’t deal with and need expert advice, there are plenty of accounting firms and consultancies that specialise in ‘forensic’ accounting and fraud.

They can provide expertise across all areas of fraud management, from detection to resolution and future fraud protection solutions, and have sophisticated tools to analyse your business’ systems and structures for possible risks.


Four types of financial fraud and how to stop them
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Tiffany Hutton

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